Escolar Documentos
Profissional Documentos
Cultura Documentos
OF INFORMATION
TECHNOLOGY
SUBMITTED To : Sir.
Javaid Zafar
Submitted by :
Sana Munir
MBO - II
CORPORATE GOVERNANCE
TABLE OF CONTENTS
1 COMPANY INTRODUCTION AND HISTORY................................... ...3
2 CORPORATE BUSINESS ACTIVITIES..............................................6
2.1 Rehabilitation Hospitals.................................................................6
2.2 Outpatient Therapy Services........................................................ ...6
2.3 Long Term Acute Care Hospital ......................................................6
2.4 Home Health...................................................................... ............6
2.5 Rehabilitation Technology......................................................... ......7
3 ACCOUNTING SCANDAL............................ ..................................8
3.1 To Meet Wall Street’s Expectation...................................................8
3.2 Insider Trading...................................................................... .........9
3.3 Personal Profit...................................................... .......................10
3.4 Hiding the Fraud: To Restructure........................................ ...........10
4 DETECTION OF ACCOUNTING FRAUD........................ ..................12
4.1 Red Flags
.................................................................................................. .......12
5 PENALTIES FOR FRAUD............................. ................................13
5.1 Richard Scrushy............................................. ..............................13
5.2 Chief Financial Officers Charges..................................... ...............13
6 AUDITOR’S ROLE IN FRAUD................................. ......................15
6.1 Ernst and Young Auditors .......................................................... ...15
6.2 FEES paid to E&Y for services....................................................... .16
6.3 Charges or penalties for E&Y........................................................16
7 BOARD OF DIRECTORS.......................................................... ....17
7.1 Healthsouth Board Viewed As Beholden To Scrushy........................17
7.2 Doubts Created
.................................................................................................. .......17
7.3 New Members In Board Of Director
.................................................................................................. .......18
8 CORPORATE SOCIAL RESPONSIBILITY........................................19
9 CONCLUSION................................. ..........................................20
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CORPORATE GOVERNANCE
Healthsouth Corporation is the leading provider of medical rehabilitation health care and
outpatient surgery services in the United
States. With more than 1,900 locations in the
United States, the United Kingdom, and
Australia, Healthsouth provides physical and
other therapy in its rehabilitation facilities,
offers imaging services through its diagnostic
centers, and provides nonemergency surgical
services at its outpatient surgery centers. The
company also has occupational medicine
clinics that deal exclusively with patients
suffering from work-related health conditions. Healthsouth has contracts with managed care
plans, insurance companies, and major corporations, including Wal-Mart and Goodyear.
Healthsouth also has alliances with professional sports associations and schools to supply
rehabilitative and sports medicine services.
Healthsouth's revenues for 1993 surged impressively to $575 million and the company assumed
the industry lead. Healthsouth stepped up its acquisition program in 1994 and 1995 by absorbing
a number of new companies. Two major purchases included the September 1994 acquisition of
ReLife Inc. and the February 1995 buyout of NovaCare, Inc.'s inpatient rehabilitation hospital
division. Significantly, in October 1995 Healthsouth announced that it had agreed to purchase the
rehabilitation services operations of Caremark International for $127 million in cash.
Healthsouth also bought Diagnostic Health Corporation, which offered outpatient imaging
services. The $1.1 billion acquisition, the company's largest to date, immediately catapulted
Healthsouth into the lead as the top operator of outpatient surgery centers in the nation.
Healthsouth's steady string of acquisitions did not end as the company headed into the second
half of the decade. In the year 1996, Healthsouth acquired Health Images. The most significant
acquisition, however, was the purchase of Horizon/CMS Healthcare, the largest provider of
specialty health care services in the United States. In 1998 Healthsouth made two major
acquisitions. The firm purchased National Surgery Centers, Inc., and also acquired 34 surgery
centers from Columbia/HCA Healthcare Corporation.
Healthsouth face difficulties in 1999. In June the company announced plans to divide its
inpatient and outpatient operations by spinning off the inpatient services into a new company, to
be called Healthsouth Hospital Corporation. For the third quarter of 1999 Healthsouth reported
revenues of $993.3 million, down from $1.05 billion during the comparable period of 1998. The
overall picture was not necessarily bleak, however, and for the nine months ended September 30,
1999, Healthsouth's revenues were $3.07 billion, up from $2.97 billion in the same period of
1999
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CORPORATE GOVERNANCE
Healthsouth is the industry leader in providing the most advanced rehabilitation technology to its
patients. These new modalities, when combined with traditional therapy, can greatly enhance
overall outcomes and improve a patient's quality of life.
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3 ACCOUNTING SCANDAL
There were various ways through which Healthsouth Corporation was notified by the Authorities
about committing the fraud. The fraud started soon after its initial public offering in 1986,
through various activities.
In 1986, the Healthsouth corporation went public, and offered its initial public offering, and at
the instruction of Scrushy, the company began to artificially inflate its earnings in order to match
the Wall Street analysts' expectations and maintain the market price for Healthsouth
corporation’s stock.
SEC said that, If the Healthsouth corporation’s actual results fell short of wall street’s
expectations, Scrushy would tell Healthsouth corporation’s management to "fix it" by
recording false earnings on Healthsouth corporation’s accounting records to make up the
shortfall.
At the meetings, they discussed the ways by which members of the accounting staff
would falsify Healthsouth's books to fill the "gap" or "hole" and meet desired earnings.
The fraudulent postings used to fill the "hole" were referred to as the "dirt."
3.1.2Overstated Earnings
Between 1999 and the second quarter of 2002, HRC intentionally overstated its earnings,
identified as "Income Before Income Taxes And Minority Interests," by at least $1.4
billion in reports filed with the Commission.
The approximate amounts of overstated "Income Before Income Taxes And Minority
Interests" since 1999 in Forms 10-K and 10-Q are as follows:
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CORPORATE GOVERNANCE
For six
1999 2000 2001 months
Income (Loss) before Income Taxes and
Form Form Form 10- ended June
Minority Interests (in $ millions)
10-K 10-K K 30,
2002
SEC while investigations concluded that Richard Scrushy was the heading towards insider
trading, resulting in loss to the shareholders. In 1997, Richard Scrushy the CEO, asked Owens
CFO to continue falsifying Healthsouth’s books and records because he was planning to sell the
stock, and also he wanted to maintain the stock’s current level.
While the scheme made by Scrushy was going on, Healthsouth’s senior officers and accounting
personnel periodically discussed with Scrushy regarding periodically increasing false financial
statements, and also tried to persuade him to abandon the scheme. Scrushy insisted that the
scheme continue because he did not want Healthsouth’s stock price to suffer. Indeed, when
Healthsouth Corporation’s accounting personnel advised Scrushy to abandon the earnings
manipulation scheme, Scrushy refused, stating in substance, "not until I sell my stock."
But on Sept. 30, 1998, after Mr. Scrushy and other senior executives had sold millions of dollars
in Healthsouth stock, the company made a startling announcement: it was likely to miss the
analysts' estimates for 1998 and 1999. The stock lost more than half of its value in less than a
month, dropping to $7.69 from $18.38 a few days before the announcement. Ms. Landry a
former employee of Healthsouth was the evidence of the insider trading regarding the executives
attitude, she listened them laughing at shareholders in 1998 after the stock's drop.
Richard M. Scrushy, the chairman and chief executive of Healthsouth, was accused for using
insider information advantage and selling about 5.2 million shares for $14.05 each May 14 and
about 2.5 million more shares back to Healthsouth at $10.06 a share on July 2003 in the weeks
before the company made an announcement was about the new payment policy of Medicare
which caused its stock price to drop for more then 50% sharply.
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Scrushy had personally profited from the scheme to artificially inflate earnings. He has sold at
least 7,782,130 shares of Healthsouth’s stock since 1999, when Heathsouth Corporation’s share
price was affected by Heathsouth Corporation’s artificially inflated earnings. Moreover,
according to Heathsouth Corporation’s 2001, Scrushy received at least $6.5 million from
Healthsouth during 2001 in "Bonus/Annual Incentive Awards." This bonus payment was based
on Heathsouth Corporation’s artificially inflated earnings. Further, Healthsouth from 1999
through 2001, paid Scrushy $9.2 million in salary. Approximately $5.3 million of this salary was
based on Healthsouth’s achievement of certain budget targets. HRC attained these budget targets
through its scheme to artificially inflate earnings.
According to Alabama special reprts, another estimate abouth scrushy pay, bonuses and Stock
sales is given below:
One former employee concluded while investigation that "Splitting up the company would make
it more difficult to trace the earnings fraud."
3.4.1 In 1992
Scrushy declared that Healthsouth had grown enormously since it had gone public and
proposed that it was "absolutely necessary" to restructure. So Healthsouth mapped out a
plan to divide the Healthsouth into three pieces each with its own president and CFO
through an informal division that left the parent company intact. But was not succeeded.
3.4.2 In 1999
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CORPORATE GOVERNANCE
Healthsouth sketched out a second restructuring plan, this plan was an official spinoff
intended to split inpatient and outpatient services and blur the old fire beneath
Healthsouth's stock. But at various times staff at the Healthsouth became alarmed and
attempted to pressure Scrushy into abandoning the fraud.
3.4.3 In 2002
The previous decayed plans for division of the company was recomposed in 2002 with a
plan to split the company into in-patient rehabilitation and a more profitable outpatient
surgery and rehabilitation group.
One employee suggested that Scrushy would become chairman of the latter, and Owen of
the former. The in-patient company would become a private company in which the fraud
could be hidden. The market refused to go along with these strategies and Healthsouth
was forced tabandon them once again. Moreover, Shareholders met and put the issues
forcefully to Scrushy.
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The fraud was massive in nature and could not stay hidden for longer period of time. The
company was on the radar of SEC from 1992.
• An employee of Healthsouth had written a letter to the E&Y audit team in June 2002
disclosing that in three specific areas of the accounts there could be problem. E&Y had
checked out the allegations, but E&Y determined that there had been no wrongdoings in
the accounts of the Healthsouth.
• An other employee after leaving the organization in 2002, tried to spread the facts about
the questionable practices were taken place in department, but his efforts resulted in
nothing. He also sent an email to Healthsouth's auditor, Ernst & Young, about a particular
area involved in fraud. But E&Y concluded that the accounting was legitimate. He tried
to make his case online, but yahoo forum readers dismissed his claims as typical internet
blather.
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CORPORATE GOVERNANCE
On March 19, 2003, the Securities and Exchange Commission (SEC) charged Healthsouth, the
nation's largest provider of outpatient surgery, diagnostic and rehabilitative healthcare services
and formerly a major player in the occupational medicine market, and its Chief Executive Officer
and Chairman Richard M. Scrushy with a massive accounting fraud.
The participation of Weston Smith, William Owens, Michael Martin, Aaron Beam and Jason
Brown in the fraud is described there as is their assistance to investigators and their guilty pleas.
Other personnel pleaded to be guilty were Malcolm McVay, Kenneth Livesay, Emery Harris,
Angela Ayers, Cathy Edwards, Rebecca Kay Morgan and Virginia Valentine.
The indictment charges that Mr. Scrushy used threats, bribes, surveillance and eavesdropping to
intimidate his executives into participating in an effort to inflate the company's profits by $2.7
billion from 1996 to 2002. Healthsouth executives talked of "filling the hole" or "filling the gap"
when they made false entries in the company's books. Government's court filed outlines six
"crimes, acts or wrongs" that were not the part of the 85-count against Scrushy that alleges he
falsified financial results by $2.7 billion since 1996.
Scrushy collected $279 million in unethical gains from fraud, including salary, bonuses and stock
options that were based on the company's performance.
3. Aaron Beam, the first chief financial officer Healthsouth Corp., was sentenced to three
months in jail today by a U.S. District judge in Birmingham. Beam was also fined
$10,000 and ordered to forfeit $275,000.
4. Healthsouth Corp. finance chief Weston Smith, who blew the whistle on the accounting
scandal that stunned the company, was given 27 months in prison and was also ordered
to forfeit $1.5 million in ill-gotten gains and will spend one year on probation after his
release.
5. William Owens, a former chief financial officer and briefly chief executive officer at
Healthsouth Corp., Birmingham, Alabama, was sentenced to five years in prison for his
role in massive accounting fraud at the company. Owens is contesting the government's
request that he forfeit $12 million in assets, and a hearing likely will be scheduled for late
January, a court clerk said.
The accounting fraud opened the door to a flood of lawsuits including separate fraud and bribery
suits against Scrushy, prison sentences and fines for the staff involved and a myriad lawsuits
involving Healthsouth itself. Healthsouth faced almost certain bankruptcy but somehow
survived.
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CORPORATE GOVERNANCE
Most of the troubling issues surrounding HEALTHSOUTH include its dealings with its
Healthsouth’s profits increased over the period of time. By 1994 the company’s revenues had
topped the billion-dollar mark, and Healthsouth was the acknowledged industry leader for
rehabilitative health care services. Ernst & Young became auditors for Healthsouth in 1984. It
has been suggested that Scrushy fired the previous auditors because they refused to meet his
requirements. As Healthsouth’s independent auditor throughout this period Ernst n Young always
gave the company a clean bill of financial health. Despite the audit firm’s vote of confidence in
its clients financial statements, documents exist that prove that the auditor’s client was
committing fraud early as 1993. It has been believed that failure of detection of fraud by E&Y at
early stages enabled the Healthsouth Corporation to continue fraud, eventually costing investors
at least 2.7 billion.
6.1.1Scrushy Schemes
Scrushy himself was undoubtedly charismatic, extremely plausible, persuasive and expert
at getting what he wanted, in one sense the ultimate con man. He recruited staff, which
were young and fresh in the organizations and from those he did businesses in
Birmingham Alabama. These young and fresh employees had the extensive knowledge of
the company they worked in and also had personal contacts and some understandings in
these organizations.
Scrushy was to create a company in which it was legitimate for senior staff to exploit
their knowledge and the vulnerability of the previous organizations from which they were
recruited. It is clear that some of these previous employees were induced to participate in
the fraud. Such activities were carried with the collaboration of their friends and previous
colleagues. So same is with the case in Ernst and Young.
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Ernst and Young's role in Healthsouth's fraud must be seen in the light of the conduct of
its accounting peers in ignoring fraud and sometimes actively participating in it.
6.1.2Recruitment Scheme
A number of Healthsouth staff, including the most recent CFO, William Owens who has
been pleaded guilty was past employees of Ernst and Young. They would have known
Ernst and Young's practices well and probably retained many friends there. Their
recruitment was aimed to design and implement a fraud that would not too obviously
trigger the auditor's alarm bells.
It was being analyzed that either these employees cooked up for malpractices or Ernst
and Young had a blind eye by simply trustingly accepted the accounts from their mates
without closely looking at their contents, which was not known.
6.1.4Why to be Picky
Ernst and Young did very profitable business with Healthsouth and its interconnected
companies. The employees of the firm received incentive payments, based on performance.
They made a large amount of money with their dealings with Healthsouth – sometimes
billions of dollars. They would have lost all incentives program if they chose to be PICKY
about the large discrepancies created US$2.5 billion empty whole in accounts.
Ernst & Young $1.16m (pounds 700,000) in audit fees and $2.39m in "audit- related fees" in
2001. The "audit-related fees" covered payments to the firm for so- called "pristine audits",
which included checking magazines in waiting rooms and making sure toilets were clean. The
company has been accused by the SEC of inflating its profits by $1.4bn since 1999.
E&Y even though having a blind eye over the mal accounting practices of the Healthsouth
Corporation, still had not been charged with criminal conduct in the fraud. But the accounting
firm still in 2007 was subjected to multiple lawsuits by shareholders and by the Healthsouth
itself.
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CORPORATE GOVERNANCE
7 BOARD OF DIRECTORS
The Board of Directors at Healthsouth Corporation were not independent of the management.
Richard Scrushy founded Healthsouth corporation in 1984, with some his associates and became,
CEO, chairman of board of directors. In 1985 another venture capitalist C. Sage Givens put up
the capital. The company maintained a close knit between the associates, even when the
company went public in 1986.
The major cause of Healthsouth downfall was the absence of independent Board of directors to
safeguard the interest of shareholders. But the tradition of the board of directors was firm enough
to be broken by any strong entity. This tradition was accelerating due to having powers to
perform misconduct.
7.2.1Board Members
The other board members also existed on the board of directors. Most of these board
members were the executives of the firms were being acquired by the Richard Scrushy.
These board members often inquired Scrushy about the financial crisis inside the
organizations. But there was no valid reply in exchange.
7.2.2Shareholders
In 1998 when there was increase in the fall of the stock price of the Healthsouth corp. I
could not be ignored. Investors and shareholders appeared to investigate. They submitted
the proposal to separate the ownership of control by having independent directors. they
suggested the board to be independent of management. But the board of directors
opposed the proposal of shareholders and in counterargument they blamed the recent
drop in stock price to be the basis of industry wide decline of earnings.
7.2.3Dismissed the concept at First
Richard Scrushy did not want to separate the board from the management, he fear the
affiliation of the board members would be formed and act would against Scrushy’s will.
Moreover the independent directors might cut short the gratuitous compensation for the
Richard Scrushy. Scrushy neglected the concept also because, he had a long withstanding
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ties with his associates and refused to approve a plan to add independent members who
might form a majority. According to the employees of the Healthsouth the associates
having close relationship with one another included three investors, George H. Strong, C.
Sage Givens, Charles W. Newhall III and Larry D. Striplin Jr. a friend of Mr. Scrushy.
In 2002 when the companies activities remained undone, the struggle was being carried down by
to recruit the outside investor. The reason of continuously interviewing the outside directors to be
recruited was to build a safety plans covering the fraud. The recent Sarbanes Oxley act stated
regarding white collar crime that the executives involved in the mal practices would be penalized
and the prison tenure will be increased.
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CORPORATE GOVERNANCE
The company for providing rehabilitative services for profit. It was facilitating the patients with
various services. But there has been no Corporate citizenship being provided by Healthsouth
Corporation.
On the other hand, the Richard Scrushy is an philanthropist. He personally had been performing
charitable doings, and was providing philanthropy to various institutes and the needy people.
The Richard M. Scrushy Charitable Foundation distributed to churches and religious groups
most of the $716,000 in donations in 2005
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9 CONCLUSION
The Healthsouth Corporation had done a successful business by its creation and expanded
enormously. But the self interest of the executives led the company suffered losses which were
not disclosed. The theme to deceive the shareholders with various malpractices took place. The
shareholder activism existed but, it took a lot of time to get notice practically.
Healthsouth executives were charges with penalties but on the other hander, investors and
shareholders faced great loss. It was the responsibility of the Board of directors to safeguard the
rights of shareholders.
Each Company is responsible for performing with ethics and promoting the corporate
governance in the organization to become a role model and aside the self interest of position
being given. Its also important to maintain independent
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